Reasons for Refinancing Your Home Loan, Including Removing PMI or MIP

Careful examination of mortgage document.Two important issues that commonly arise over the years of paying down a mortgage loan are how to remove the mortgage insurance (if applicable) and determining if you should refinance your home loan. Both have an impact on your overall financial picture, so it is beneficial to understand the ins and outs of each.

Removing Mortgage Insurance from Loan Payments

Cancel Private Mortgage Insurance (PMI) – Conventional Loans

If you decided to secure a conventional mortgage loan, the most common type of home loan, with less than a 20% down payment, chances are high you have Private Mortgage Insurance (PMI). However, once your equity in the home reaches 20%, you should be eligible to remove the PMI upon request. At 22% equity it’s supposed to fall off automatically.

Private mortgage insurance protects a lender against loss if a borrower defaults on their loan and enables borrowers with less cash to have greater access to homeownership. But it does not provide any protection against default for the borrower.

At closing, the lender is required by law to outline how many years and months it will take to pay the loan down to a point where you can remove PMI. Mortgage servicers are required to cancel the insurance once the loan-to-value reaches 78%. A borrower should request this is done at 80% however, to save money, which is acceptable in most circumstances.

A time when PMI may not be removed at 20% equity is when the loan was made, and the lender identified the borrower as high risk. In this situation, the lender could require PMI to remain on the loan until reaching 50% equity. You can also enter this high-risk profile if you miss mortgage payments regularly or you no longer use the property as a primary residence.

Calculating Home Equity

The calculation to determine the equity in a home is straightforward. This is done by subtracting the loan balance from the appraised value of the home. For instance, if the home is worth $200,000 and the outstanding loan balance is $150,000, the borrower is said to have $50,000 in equity in the property.

To calculate the percentage, you would then take this equity portion and divide it by the value of the property. In this case: $50,000 / $200,000 equals 25% equity. In most circumstances, this borrower would be eligible to eliminate the PMI once they’ve reached this point.

Remove Mortgage Insurance Premium (MIP) – FHA Loans

If you received your FHA loan before June 3, 2013, you are eligible for MIP cancelation after five years as long as you have 22% equity in the property and made all of your monthly mortgage payments on time.

New FHA loans now require mortgage insurance premiums to be paid for the life of the loan unless you put at least 10% down on the home and have owned it for 11 years. At which time you can request to cancel the MIP. Otherwise, you will need to refinance into a conventional loan, or pay it off another way to remove the added cost.

Common Reasons to Refinance a Home Loan

Beyond saving money by removing mortgage insurance premiums from the monthly mortgage payment, there are various other reasons for a borrower to pursue refinancing of their home loan:

  • Credit score has increased making the borrower eligible for lower rates
  • Borrower wants to switch the type of mortgage (adjustable rate to fixed for example)
  • Borrower wants to shorten or extend the length of the mortgage loan
  • Borrower wants to take advantage of their home equity and withdraw it as cash
  • Interest rates have come down and borrower wants to save money over the life of the loan

The final two bullet points above are typically the most common reasons people choose to refinance their home loan.

With either case, a borrower must weigh the total cost of the refinance against the long-term savings. Often, refinancing will require various closing costs, which can be substantial.

Final Thoughts on Refinancing Home Loans

When evaluating the financial benefit of a mortgage refinance, a borrower should think of how long they will remain in that property, and if the upfront costs of refinancing will be regained over that time period. It’s a good idea to find a lender that you can trust and ask them a handful of questions before making your decision.

Next Up, Tips for Avoiding Foreclosure

As a new homeowner, the last thing you want to do is lose the valuable real estate you worked so hard to obtain. However, sometimes life can throw you a curveball or two. If you think you could ever experience trouble making your mortgage payments be sure to read our next article covering some of the best ways to avoid foreclosure as it pertains to repaying your mortgage loan.

Borrow up to $50,000 with low fixed rates!

Posted on February 12, 2021 by in Home Mortgage Refinancing

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